Trade deals need careful planning

By Eric Chiou邱奕宏

Do free trade and liberalization benefit everybody and boost a nation’s economy? Recent controversies over the cross-strait service trade agreement have put this oft-asked question back in the spotlight. Economists are divided and provide no definite answers. They are similarly noncommittal on the proliferation of regional trade agreements around the world. Most people simply assume that, because of the trade liberalization they bring, trade agreements definitely do more good than harm to a nation’s economy.

This assumption not only ignores the negative consequences of such an agreement on an economy, but also wrongly perceives free trade as a panacea to a nation’s international competitiveness.

The nation seems to be misguided in this manner; it is bewitched by the promise of trade liberalization and craves attention from its potential partners — jumping at every trade opportunity, such as the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

The economy relies heavily on external trade, but its free-trade agreements cover only a low ratio of all export goods, so it is understandable that Taiwan is eager to increase its number of trade partners to improve this ratio and accelerate its pace of liberalization.

Although the Chinese Nationalist Party (KMT) government’s earnestness to increase trade deals is understandable, it may be dangerous if policymakers only consider the benefits of joining regional trade blocs, but neglect the downside. They must learn strategic thinking: how to manage risks and use any strengths as leverage.

Despite numerous studies highlighting favorable results for the economies involved in trade agreements, it is regrettable that most research fails to specify potential risks to different industrial sectors. Leaders should not be so naive to assume that an agreement signifies the arrival of an economic paradise in which all the people in each member nation have their lives measurably improved. It is wishful thinking to believe that every industrial sector will see the same benefits.

There is no substantiation for such thinking, neither theoretically nor empirically. The theories of international trade say that deeper economic integration among free trade members is likely to generate better economic welfare and lead to more reasonable and efficient distribution of resources. However, these theories do not claim that each industrial sector within the partner states will benefit equally from the arrangement; neither do these theories promise that individual sectors will not suffer.

Despite likely increases in overall economic welfare for the members of a trade region, there is no guarantee of positive effects for every sector. Existing literature has not explored which industrial sectors in member nations are likely to receive most gains, let alone describe which sectors will lose out.

Because trade agreements inevitably create winners and losers, policymakers should be considering the consequences more, rather than painting a rosy picture of future trade formations. For instance, is it reasonable and right to chase an agreement after considering the interests of domestic industries? Which sectors are likely to be winners and which are likely to be more vulnerable? What if the study of an arrangement shows more harm than good will come to a state’s prioritized sectors, even though the overall economic projection is good?